Tax Rate on Tax Deferred Liability

[blackscholesvol]

A dance club purchases new sound equipment for $25,352. It will work for 5 years and has no salvage value. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. Annual revenues are constant at $14,384 over these five years. If the tax rate for years 4 and 5 changes from 41% to 31%, what is the deferred tax liability as of the end of year 3?
The solution uses 31% as the tax rate but isn’t that tax rate for year 5. We’re looking for tax rate for year 3? Or am I misreading this?

 

[cpk123]

when tax rate changes - the DTL and DTA (as applicable) needs to be re-evaluated - to determine the DTL / DTA at the new rate.
So DTL / 0.41 * 0.31 = new DTL
likewise for DTA as well.
DTL / 0.41 = Amount of the Liability that was deferred. Now recalculate the amount of DTL
which is the Amount of Liability that was deferred * 0.31 (new tax rate).